LONDON (CNNfn) - Western banks are charging Japanese banks for the privilege of holding their yen deposits, in what one economist said was the "unprecedented" use of negative inter-bank interest rates.
In a further damaging sign of the extent of Japan's economic woes overseas banks such as Barclays Capital and JP Morgan have begun to charge negative nominal interest rates to Japanese banks for holding yen deposits.
"It was a big surprise to the market and to economists who have long held that nominal interest rates cannot fall to less than zero", said West LB Securities treasury economist Richard Hostetter.
"Japanese banks are essentially paying for banks to hold money for them. I don't think it has ever happened before in the history of the inter-bank market. I didn't think it could happen".
Japanese banks have been reluctant to deposit money with local institutions because of anxieties about solvency in the embattled local financial system.
With the stock market shaky and government bonds offering low yields, there are few other places for Japanese banks to put their money.
The Japanese press have been critical of Western banks for imposing negative rates on their local counterparts, but Hostetter disagreed that the fault lay with overseas institutions.
"It's a condemnation of what is going on with the financial situation", he said. "It's quite embarrassing for Japanese policy makers".
But Hostetter predicted the days of negative interest rates would prove short-lived. "There is a huge scramble for funds to cover the end of the year in many markets", he said. "It has started a bit earlier this year".
He added: "It is an unprecedented and bizarre situation but will probably not last for very long - probably for two or three weeks".